Central banks to the rescue

March 10th, 2017

Central banks to the rescue

Just as the world’s central banks moved to rescue the banking system during the 2008 World Financial Crisis, they are now moving to rescue gold and silver investors, albeit the central banks are not rescuing gold/silver investors wittingly. Nonetheless, they are doing it just the same.

Because of the possibility of three consecutive Fed rate hikes this year, gold and silver prices suffered this week. Fears surfaced that the Fed may usher in a period of “tight money.”

A rate hike next week would be three consecutive hikes, and the first since 2005-2006, which moved the Fed funds rate from 1% to 5% in multiple increases. However, the 2008 WFC followed; therefore, it is likely that the Fed will move cautiously when it comes to multiple rate hikes.

The likelihood of the Fed moving toward seriously tight money is not good. The reason for raising interest rates — under Keynesian thinking, which dominates the Fed — is to shut down inflation and/or to keep the economy from overheating. Neither runaway inflation nor an overheated economy is on the horizon.

What is on the horizon is a world economy that is still struggling. What is a reality is that central banks worldwide are continuing easy money policies.

In 2008, the Fed’s balance sheet held $850 billion in assets. Today, the Fed holds more than $4.4 trillion in assets, all purchased with money that was created “out of thin air.” Most of the assets the Fed holds are US government bonds, but much of it is nearly worthless Fannie Mae, Freddie Mac and GSE debts.

Further, David Stockman, Budget Director under Ronald Reagan, says the federal budget has a $10 trillion deficit increase locked in over the next ten years. And, that’s before Trump starts his infrastructure rebuilding and military buildup.

Yes, Trump has promised to cut spending from other programs to pay for the military buildup, but already we’ve seen the turmoil within the GOP about doing away with Obamacare, which was advocated by nearly every Republican. Deficits under Trump will continue, and they will be financed by Fed money creation. The projected budget deficit for this fiscal year (ending September 30) is $559 billion.

In the European Union, European Central Bank head Mario Draghi has promised to continue the ECB’s quantitative easing program despite objections from Germany.

The only consolation he has given the hawks (those who oppose loose money) is that the interest rate, which now stands at -.4%, is not likely to go lower. Further, a recent ECB Governing Council statement affirmed that interest rates are likely to stay at current levels even after the quantitative easing program terminates.

In Japan, which hosts the world’s third largest economy, the central bank is buying equities to boost inflation rates. According, to recent reports, Japan is starting to see higher prices.

Meanwhile, China is relying almost solely on debt to finance projects worldwide. The Financial Times reports that China’s banking system has overtaken that of the eurozone’s, as measured by “bank assets.”

Chinese bank assets hit $33 trillion at the end of 2016, versus $31 trillion for the eurozone, $16 trillion for the US and $7 trillion for Japan. Remember, those assets were purchased with money created “out of thin air.”

Interest rate manipulations, printing money or money creation — whatever you want to call it — are now accepted as the norm. This is a climate in which the gold and silver will do very well. Obviously, prices will not go straight up, they never have even in the wildest bull markets.

Lower gold and silver prices should be viewed as buying opportunities. With central banks creating money at the rates they are, inflation — and perhaps an overheated economy — cannot be far behind.

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